IDEAS home Printed from https://ideas.repec.org/p/bis/biswps/122.html

Positive feedback trading under stress: Evidence from the US Treasury securities market

Author

Listed:
  • Benjamin H. Cohen

    (International Monetary Fund (IMF))

  • Hyun Song Shin

    (Princeton University - Department of Economics)

Abstract

A vector autoregression is estimated on tick-by-tick data for quote-changes and signed trades of two-year, five-year and 10-year on-the-run US Treasury notes. Confirming the results found by Hasbrouck (1991) and others for the stock market, signed order flow tends to exert a strong effect on prices. More interestingly, however, there is often a strong effect in the opposite direction, particularly at times of volatile trading. Price declines elicit sales and price increases elicit purchases. An examination of tick-by-tick trading on an especially volatile day confirms this finding. At least in the US Treasury market, trades and price movements appear likely to exhibit positive feedback at short horizons, particularly during periods of market stress. This suggests that the standard analytical approach to the microstructure of financial markets, which focuses on the ways in which the information possessed by informed traders becomes incorporated into market prices through order flow, should be complemented by an account of how price changes affect trading decisions.

Suggested Citation

  • Benjamin H. Cohen & Hyun Song Shin, 2003. "Positive feedback trading under stress: Evidence from the US Treasury securities market," BIS Working Papers 122, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:122
    as

    Download full text from publisher

    File URL: http://www.bis.org/publ/work122.pdf
    File Function: Full PDF document
    Download Restriction: no
    File URL: http://www.bis.org/publ/work122.htm
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    2. Michael J. Fleming, 2003. "Measuring treasury market liquidity," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-108.
    3. Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
    4. Martin D. D. Evans, 2011. "Exchange-Rate Dynamics," Economics Books, Princeton University Press, edition 1, number 9475, December.
    5. Piazzesi, Monika, 2001. "An Econometric Model of the Yield Curve With Macroeconomic Jump Effects," University of California at Los Angeles, Anderson Graduate School of Management qt5946p7hn, Anderson Graduate School of Management, UCLA.
    6. Richard K. Lyons, 1996. "Foreign Exchange Volume: Sound and Fury Signifying Nothing?," NBER Chapters, in: The Microstructure of Foreign Exchange Markets, pages 183-208, National Bureau of Economic Research, Inc.
    7. Gabriele Galati & Kostas Tsatsaronis, 2003. "The impact of the euro on Europe's financial markets," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 12(3), pages 165-222, August.
    8. C. H. Furfine, 2001. "The interbank market during a crisis," BIS Working Papers 99, Bank for International Settlements.
    9. Roll, Richard, 1984. "A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
    10. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    11. Easley, David & O'Hara, Maureen, 1992. "Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
    12. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
    13. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    14. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290, World Scientific Publishing Co. Pte. Ltd..
    2. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    3. Mark D. Flood & John C. Liechty & Thomas Piontek, 2015. "Systemwide Commonalities in Market Liquidity," Working Papers 15-11, Office of Financial Research, US Department of the Treasury, revised 14 Dec 2016.
    4. Manganelli, Simone, 2005. "Duration, volume and volatility impact of trades," Journal of Financial Markets, Elsevier, vol. 8(4), pages 377-399, November.
    5. Ben Sita, Bernard, 2010. "Autocorrelation of the trade process: Evidence from the Helsinki Stock Exchange," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 538-547, November.
    6. Jondeau, Eric & Lahaye, Jérôme & Rockinger, Michael, 2015. "Estimating the price impact of trades in a high-frequency microstructure model with jumps," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 205-224.
    7. Ferriani, Fabrizio, 2010. "Informed and uninformed traders at work: evidence from the French market," MPRA Paper 24487, University Library of Munich, Germany.
    8. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    9. Nikolaus Hautsch, 1999. "Analyzing the Time between Trades with a Gamma Compounded Hazard Model. An Application to LIFFE Bund Future Transactions," Finance 9904002, University Library of Munich, Germany.
    10. Bowe, Michael & Hyde, Stuart & McFarlane, Lavern, 2013. "Duration, trading volume and the price impact of trades in an emerging futures market," Emerging Markets Review, Elsevier, vol. 17(C), pages 89-105.
    11. Stanley, H.E. & Gopikrishnan, P. & Plerou, V. & Amaral, L.A.N., 2000. "Quantifying fluctuations in economic systems by adapting methods of statistical physics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(3), pages 339-361.
    12. He, Yan & Lin, Hai & Wang, Junbo & Wu, Chunchi, 2009. "Price discovery in the round-the-clock U.S. Treasury market," Journal of Financial Intermediation, Elsevier, vol. 18(3), pages 464-490, July.
    13. Kalaitzoglou, Iordanis Angelos & Ibrahim, Boulis Maher, 2015. "Liquidity and resolution of uncertainty in the European carbon futures market," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 89-102.
    14. Roel C.A. Oomen, 2004. "Statistical Models for High Frequency Security Prices," Econometric Society 2004 North American Winter Meetings 77, Econometric Society.
    15. Iordanis Angelos Kalaitzoglou & Boulis Maher Ibrahim, 2015. "Liquidity and resolution of uncertainty in the European carbon futures market," Post-Print hal-01107956, HAL.
    16. Nowak, Sylwia & Anderson, Heather M., 2014. "How does public information affect the frequency of trading in airline stocks?," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 26-38.
    17. Lee, Yi-Tsung & Lin, Ji-Chai & Liu, Yu-Jane, 1999. "Trading patterns of big versus small players in an emerging market: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 701-725, May.
    18. Gerhard, Frank & Hess, Dieter & Pohlmeier, Winfried, 1998. "What a Difference a Day Makes: On the Common Market Microstructure of Trading Days," CoFE Discussion Papers 98/01, University of Konstanz, Center of Finance and Econometrics (CoFE).
    19. Malgorzata Doman, 2008. "Information Impact on Stock Price Dynamics," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 8, pages 13-20.
    20. Khanna, Naveen & Sonti, Ramana, 2004. "Value creating stock manipulation: feedback effect of stock prices on firm value," Journal of Financial Markets, Elsevier, vol. 7(3), pages 237-270, June.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bis:biswps:122. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Martin Fessler (email available below). General contact details of provider: https://edirc.repec.org/data/bisssch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.